Massive profit for CommBank

Commonwealth Bank boss Ian Narev has received a vote of confidence from the market in response to a stronger-than-expected profit performance.

The result was always be controversial in the minds of average punters given that the CBA did not pass on in full all of the RBA's interest rate cuts. But this was a factor in the bank's strong performance.

Cash earnings for the six months to December rose by 6 per cent, despite the fact that the banking market generally is grappling with a weak lending environment.

Narev's strategy demonstrates he is prepared to sacrifice some market share in order to win back some margin. CBA is the largest of the Australian banks and beats its three major competitors on a range of measures including the all important return on equity.

However, the CBA has posted below average growth in both retail deposits and home loans, rather than become too immersed in intense competition with NAB, Westpac and ANZ.

The CBA is not the price maker in the sustained grab for deposit funds. Its loans to customers are already 63 per cent funded by deposits.

More importantly, the recent fall in the cost of wholesale funding means it is now a vastly cheaper source of funding than deposits.

The funding mix is part of the reason the intensely scrutinised margin between the cost at which CBA borrows and the cost at which it lends - the net interest margin - has improved over the previous six months.

Another reason is that some portion of the of the Reserve Bank Australia interest rates falls were not passed on by the banks - including the CBA - to customers. That also allowed the major banks to claw back some interest rate margin.

While funding and interest rates remain a highly contentious issue for CBA customers, the shareholders have clearly been beneficiaries.

With cash profit up by 6 per cent, a result that beat estimates, the share price responded accordingly moving to an all-time high of $67.11 by noon - and rating it as the third largest company in Australia based on market capitalisation of around $108 billion. By way of reference, that is larger than the combined market capitalisation of Germany's listed banks.

Despite slow credit growth conditions the CBA has capitalised on cheaper funding and some gains in productivity.

Most of the major business units improved their profits - led by the Australian retail bank and the wealth management business, which grew 13 per cent and 10 per cent respectively.

Narev will be under a deal of pressure from a government in election mode to pass on any future RBA interest rate cuts.

There have even been suggestions that out-of-cycle interest rate cuts may be contemplated by the major banks in response to increasing competition from the second tier banks.

But given the tone of comments made by Narev, it would appear less likely that CBA would dive early into a war on loan rates.

The CBA is less in need of funding from customer deposits which explains why it is not leading the battle for market share.

The bank says there is some early evidence that some movement from deposits into investing in the stock market. Ironically, one of the best stock market picks would be CBA.